Working Capital Financing Policy and Profitability: Empirical Study on Bangladeshi Listed Firms

Abstract

Aims: For any manufacturing organization, working capital management decision is considered to be one of the crucial managerial decisions. In the working capital management process, an aggressive financing policy uses higher levels of current liabilities and less long-term debt where a conservative financing policy uses more long-term debt and less current liabilities. Therefore, it is an important decisional issue in case of working capital financing policy, whether a manager should be aggressive and bear all the hassles of managing current liabilities or remain conservative and let the chance of minimizing cost of capital. This study attempts to solve this puzzle by examining the impact of working capital financing policy on firm profitability from the perspective of a developing country which is Bangladesh. Methodology: The study took 80 Dhaka Stock Exchange (DSE) listed manufacturing companies over a sample period of 2009-2014 and employed fixed effect panel data regression technique. Results: The study finds a negative impact of working capital financing policy on firm’s profitability measured by return on assets (ROA). Conclusion and Recommendation: At the policy level for implementing working capital financing policy, the study suggests to be conservative by relying more on long-term financing alternatives rather short term ones.